For a variety of reasons, CPAs increasingly are being requested to
prepare and/or report on financial statements of an estate. Typically,
these financial statements are intended to meet the requirements of a
probate court or the beneficiaries of the estate. When the CPA is
engaged to prepare/report on financial statements of an estate, he/she
quickly will become aware that estate accounting presentation,
disclosure, and reporting issues do not parallel the requirements in
these areas that exist for a typical corporate reporting entity. Very
little authoritative guidance related to estate accounting and reporting
issues is available.

The purpose of this article is to identify the presentation,
disclosure, and reporting issues that the CPA is likely to encounter
when preparing/reporting on financial statements of an estate. Questions
that will be addressed in this article include:

* Are the Statements on Standards for Accounting and Review
Services [SSARSs] applicable to estate accounting engagements?

* If the SSARSs reporting requirements are applicable to an estate
accounting, what type compilation/review report should be issued as a
result of these engagements?

Do GAAP Exist for Financial Statements of an Estate?

Since no authoritative rule-making body designated by the Council
of the American Institute of Certified Public Accountants [AICPA] has
issued any technical literature applicable to an estate accounting, and
since the determination of how to account for an estate depends upon [or
is subject to] a proper interpretation of a governing instrument [i.e.,
the will] and the laws of the state having jurisdiction over the estate,
some CPAs argue that there are no GAAP related to an estate accounting.
However, the fact that no AICPA Council-designated pronouncement
addresses estate accounting and reporting issues does not necessarily
mean that there are no GAAP for these engagements.

The basic accounting conventions included in The Uniform Principal
and Income Act [the Act] of 1931 and/or the 1962 Revised Act have been
adopted by forty-two states. Also, the Uniform Laws Commission has
developed two new model statutes that, if/when adopted, will change the
statutory responsibilities of trustees/fiduciaries. The Uniform Prudent
Investor Act "raises the bar" of care for trustees/fiduciaries
by requiring them to utilize modem portfolio theory in the development
of investment management strategies. To date, thirty-six states have
enacted this law. The new Uniform Principal and Income Act [1997] also
was approved by the Commission in July 1997. However, to date, only one
state [Oklahoma] has adopted the provisions of the 1997 Act. As such,
this article utilizes the provisions of the more widely-used 1931 Act
[as amended in 1962].

Section 2(a) of the 1962 Revised Act provides a hierarchy of
accounting authority for the treatment of a fiduciary transaction
[including transactions associated with an estate]. This GAAP hierarchy
is as follows:

* First level -- the governing instrument [i.e., the will].

* Second level -- if the governing instrument is silent related to
a particular transaction, the CPA should look next to state law.

* Third level -- if state law is silent about a particular
transaction, the Act stipulates that the accounting for the transaction
should be based on whatever is considered to be both reasonable and
equitable.

The Act creates an interesting dilemma for CPAs. On the positive
side of the issue, it establishes a body of accounting guidance that can
be applied consistently in most states. On the negative side [by making
the governing instrument the overriding authority for each estate
accounting engagement], it creates an inconsistent set of circumstances where potentially no two estates are accounted for in the same manner.
The potential inconsistency in accounting, and the ability of the
governing instrument to establish unique estate accounting principles,
are the main reasons that some CPAs believe that GAAP do not exist for
fiduciary engagements. CPAs who agree with this reasoning conclude that
the basis of accounting used by an estate is not GAAP; rather, they
argue that it is the basis defined in the governing instrument [i.e.,
the will].

[Practitioner Note: After outlining a GAAP hierarchy for an estate
accounting, the Act also discusses in detail how to account for various
receipts and expenditures as well as delineating what transactions
normally affect principal and income. CPAs should become very familiar
with this Act and/or other governing state laws when they are engaged to
prepare an accounting of an estate.]

In addition to the Act, the Committee on National Fiduciary
Accounting Standards [formed in 1972 with its report issued in May
1980], comprised of representatives from the American Bankers
Association Trust Division, the American Bar Association Section on Real
Property, Probate and Trust Law, the American College on Probate
Counsel, the National Center for State Courts, the National College of
Probate Judges, and the AICPA jointly formed a National Fiduciary
Accounting Standards Project Committee. The final report of the
Committee, Uniform Fiduciary Accounting Principles and Model Account
Formats, establishes a basic objective for an estate accounting and six
accounting principles that may be utilized in the accounting for an
estate.

According to the Committee report, the fundamental objective of an
estate accounting should be to provide essential and useful information
in a meaningful form to the parties interested in the accounting
process. It also is important that the accounting be sufficiently simple
to enable its preparation without unreasonable expense to the estate or
undue distraction from the ongoing administration of the estate.
Finally, although the parties should understand the nature of the
accounting process and the need to protect their interests, the
relationship of trust and confidence existing between the executor of
the estate and the beneficiaries of the estate is [within itself] very
important and the accounting should not be presented in an adversarial format that will impair this relationship.

The following fiduciary accounting principles were established by
the Committee:

* Accounts should be stated in a manner that is understandable by
persons who are not familiar with practices and terminology peculiar to
the administration of estates.

* An estate accounting should include a concise summary of its
purpose and content.

* An estate accounting should contain sufficient information to put
the interested parties on notice as to all significant transactions
affecting the administration of the estate during the reporting period.

* An estate accounting should include both carrying values [representing the value of assets at acquisition by the executor] and
current values at the beginning and end of the reporting period.

* Gains and losses incurred during the reporting period should be
shown separately in the same schedule.

* The estate accounting should reflect significant transactions
that do not affect the amount for which the executor is accountable.

What are the Unique Aspects of an Estate Accounting?

CPAs quickly will become aware of the fact that an estate
accounting engagement is unique when compared to other
"typical" accounting engagements. Some of the unique aspects
of these engagements are:

* The normal valuation basis for the assets of an estate is the
current value of those assets as of the date that the financial
statement(s) is prepared. This valuation basis contrasts sharply with
the historical cost basis of accounting utilized in financial statements
of the typical corporate reporting entity.

* The determination of how to account for principal and/or income
of the estate normally depends on the terms of each will or on the
requirements of state law. As such, there can be a lack of consistency
between/among individual estates in the accounting for transactions that
affect principal or income. This inconsistency significantly is
different from the relative consistency of accounting for most
transactions of the typical corporate reporting entity.

* The executor of an estate is not responsible for recording
liabilities; he/she only is responsible for the assets of the estate.
Creditors are responsible for filing claims against the estate, but
these claims are not reflected as liabilities in the financial
statements. Further, notes payable secured by a deed of trust on assets
of an estate are not reflected in the estate accounting as liabilities;
only cash payments on these claims/debts are reflected in the estate
accounting under the disbursement caption. Accounting requirements for
the typical corporate reporting entity include measurements associated
with both assets and liabilities.

* Although some estate accountings are a matter of public record,
rarely are they requested by [or submitted to] third parties. Rather,
these accountings merely are a part of the legal papers in an accounting
proceeding, served on the specific parties interested in the estate
being settled. Financial statements of the typical corporate reporting
entity are considered to be "general purpose" financial
statements available for use by a wide variety of investors, creditors,
and other interested parties.

The primary accounting practices that have emerged in recent years
that could be categorized as GAAP for an estate accounting are as
follows:

* The assets under the executor's control should be accounted
for in accordance with the will and/or state law. Normally, such
accounting pertains to the determination of transactions that affect the
interests of various classes of beneficiaries.

* Assets over which the executor has no control are excluded from
any financial statements reported on and/or prepared.

[Practitioner Note: Most importantly, CPAs should be aware that the
term "estate" might have different meanings in different
contexts. The "administrative estate" and the "taxable
estate" of a decedent in many cases will include different
property. For example, a taxable estate may include gifts made before
death that still are considered to be taxable property of the estate.
These gifts would not be part of the administrative estate since the
executor has no control over these assets. Financial statements that are
prepared on an income tax basis, rather than on a GAAP basis, would be
considered prepared on a comprehensive basis of accounting other than
GAAP. In these circumstances, certain assets over which the executor has
no control might be included in the estate accounting.]

* Assets are not recognized in the estate accounting until there is
passage of legal title, other indications of ownership, or the asset has
been converted to cash. Therefore, receivables are not recognized unless
there is written evidence of their existence. Further, accrued interest and dividends may be assets for estate tax purposes but not for GAAP
estate accounting purposes.

* Liabilities and disbursements are not recognized until there is
payment by transferring cash or another asset of the estate. This is a
departure from the usual practice [even for a tax or modified cash basis
reporting entity] of recognizing liabilities when assets are acquired.
For example, the assets of an estate might include a farm with a related
mortgage payable. The estate accounting would disclose the current value
of the farm but not the related mortgage debt. Many CPAs are
uncomfortable with this departure from "typical" accounting
practices for reporting entities other than estates and encourage the
executor to disclose in a note the related debt in note [or
parenthetically on the face of the financial statement].

[Practitioner Note: The use of cash basis recognition principles
creates another potentially confusing issue for CPAs. Some CPAs believe
that the term GAAP is synonymous with accrual accounting. Therefore,
they believe it would be incorrect to imply that the accounting for an
estate is in accordance with GAAP. As such, these CPAs would
characterize the estate accounting as being in accordance with cash
basis accounting and reporting principles.]

* There is one principal financial statement [referred to as a
Charge and Discharge Statement or a Summary of Account] that may be
supported by supplementary schedules and/or notes explaining items
reflected in the financial statement. The statement most closely
resembles the Statement of Cash Flows that is included in the financial
statements of the typical corporate reporting entity. It begins with
assets available at the beginning of the period, shows receipts and
disbursements during the period, and ends with assets available at the
end of the period. Exhibit I represents an example of a typical Charge
and Discharge Statement.

* Assets are reported in the financial statement(s) of the estate
at fiduciary acquisition value, which represents the market value of the
assets on the date they are transferred to the executor [or cost for
assets purchased] and at current value as of the financial statement
date.

Are the SSARSs Applicable to an Estate Accounting Engagement?

Pursuant to the provisions of SSARS No. 1, entitled Compilation and
Review of Financial Statements, a financial statement is a presentation
of financial data, including the accompanying notes, derived from
accounting records that is intended to communicate a reporting
entity's economic resources and/or obligations at a particular
point in time, or changes in these resources/obligations for a given
period of time, in accordance with GAAP or other comprehensive basis of
accounting [OCBOA]. Paragraph 4 of SSARS No. 1 stipulates that an estate
financial statement qualifies as a presentation of financial data on
which the SSARSs reporting requirements generally are applicable.
However, the applicability of these reporting requirements easily can
vary depending on the unique nature of the engagement.

For example, situations likely will occur where the CPA is named to
be the executor of an estate of a deceased relative, friend, or client.
In these circumstances [assuming there are no contrary requirements of a
court or law], some CPAs have questioned whether they are subject to the
SSARSs reporting requirements. The answer to this question is not clear
and practice varies. Some CPAs believe that when they are acting as the
executor of an estate, this work falls outside the purview of public
accounting [i.e., the SSARSs would not apply] while others believe that
this work is public accounting-related [i.e., the SSARSs would apply].

CPAs who argue that fulfillment of an obligation of executor would
not fall within the realm of public accounting would argue that this
work is analogous to the executor preparing his/her own personal income
tax return or financial statements. In these circumstances, the executor
is the "primary signer" of the estate tax return; he/she does
not sign the return as if he/she were a third-party preparer. Since
there is no SSARSs reporting requirement that exists for a CPA preparing
his/her own financial statements, some CPAs argue that the SSARSs should
not be applicable to an estate accounting where the CPA is the executor
of the estate.

Another argument that CPAs utilize related to the inapplicability of the SSARSs to an estate accounting when the CPA is the executor of
the estate is that the SSARSs are not applicable to a CPA in industry
who is a representative of the company who employed him/her. Since CPAs
in industry who prepare financial statements of their employers are not
subject to the SSARSs reporting requirements, some CPAs argue that an
executor who is issuing financial statements of an estate also should
not be subject to the reporting requirements of the SSARSs.

CPAs who believe that the SSARSs reporting requirements are
applicable when the CPA is designated to be the executor of the estate
argue that the will typically stipulates that the executor is to be paid
a reasonable fee for his/her services. If the CPA is receiving a fee for
services, the "general public" probably would view the CPA as
practicing public accounting, even though the CPA also has been
designated to be executor of the estate.

While both of these arguments [applicability versus inapplicability
of the SSARSs] appear to have merit, a logical approach to resolving
this issue would be to consider the perception by the parties interested
in the estate accounting [e.g., creditors of the estate, beneficiaries
of the estate, and/or a court of law]. When an individual CPA is related
to the deceased, and he/she personally [not the CPA firm that employs
him/her] is named to be the executor of an estate, it is unlikely that
he/she would be viewed by interested parties as practicing public
accounting while he/she is administering the estate. Conversely, if the
CPA is not a relative but, instead, the former CPA of the deceased, the
CPA probably would be perceived as practicing public accounting by
parties interested in the estate accounting. If the CPA is not
practicing public accounting, the SSARSs would not be applicable; if the
CPA is practicing public accounting, the SSARSs would be applicable.

When a CPA is hired by an executor to perform an estate accounting
that results in a financial statement(s), then the provisions of the
SSARSs would be applicable unless there is a court of law requirement to
the contrary. In these circumstances, most CPAs probably would agree
that they would be practicing public accounting since they have been
engaged by a third-party [i.e., the executor] to prepare and/or report
on the financial statements.

[Practitioner Note: Frequently, CPAs are asked to prepare an estate
accounting for a court of law. In these circumstances, the requirements
of the court have priority over the requirements of the SSARSs. If the
court requests a report that would differ from the report required under
the SSARSs, the CPA should comply with the court; conversely, if the
court is silent related to reporting requirements, CPAs should follow
the requirements of the SSARSs. Very importantly, the SSARSs reporting
requirements are not applicable to tax return engagements; they would be
applicable only to engagements where the CPA is engaged to prepare
and/or report on a financial statement(s).]

What Type Compilation/Review Reports Would be Applicable for an
Estate Accounting?

Outside circumstances where the CPA/executor is a relative of the
decedent [the CPA is not practicing public accounting], and
circumstances where a court requests a report that would be different
from a report prepared under the SSARSs [the CPA should comply with the
requirements of the court], the SSARSs should be considered applicable
to engagements to prepare/report on financial statements of an estate.
Even when the SSARSs are considered to be applicable, questions have
been raised concerning whether the appropriate SSARSs report should be a
standard GAAP-based report or a report related to a financial
presentation that is in compliance with terms of an agreement.

CPAs who argue that the appropriate report for an estate accounting
is the standard GAAP-based SSARSs report argue that adequate accounting
principles exist so that GAAP do exist for these types of financial
presentations. Utilizing the assumption that GAAP do exist for estate
accountings, the SSARSs reporting requirements in these circumstances
would parallel the requirements for any other "reporting
entity" that follows GAAP presentation requirements. The
substantive difference in a SSARSs report based on an estate accounting
would be a modification of the terminology in the report to be
consistent with the information being presented. Exhibit II represents
an example of a standard compilation report that may be issued as a
result of a GAAP-based estate accounting. Exhibit III represents an
example of a standard review report that may be issued as a result of a
GAAP-based estate accounting.

Paragraphs 19 through 21 of SSARS No. 1 allow CPAs to accept
compilation engagements in circumstances where "management"
elects to omit substantially all of the disclosures required by
GAAP/OCBOA. In those circumstances, a third paragraph is added to the
standard three paragraph compilation report that clearly indicates the
election to omit the disclosures, the fact that if the disclosures were
included in the financial statements, they might influence a user's
conclusions about financial results, and the fact that the financial
statements are not designed for uninformed users. As noted earlier, the
Committee on National Fiduciary Accounting Standards concluded that
estate accountings should be prepared in a manner that is understandable
by persons who are not familiar with practices and terminology peculiar
to estates. As such, while CPAs "technically" are allowed to
accept a compilation engagement where the financial statements would
omit substantially all disclosures, and the resulting report would
indica te the omission of the disclosures, this approach probably should
not be utilized by CPAs associated with an estate accounting.

Generally, CPAs should recommend [as a minimum] that the following
disclosures accompany any estate accounting:

* A summary of significant accounting policies [explaining the
accounting principles and practices utilized in the estate accounting].

* A disclosure of significant transactions that do not affect the
amounts within the estate for which the executor is accountable [e.g.,
any debt that is secured by a deed of trust on the assets of the
estate].

* A description of methods utilized to determine valuation
measurements in the estate accounting.

* A disclosure of any significant subsequent events [e.g., a
significant decline in the value of an investment] that occurred between
the financial statement date and the date on the SSARSs report. Some
CPAs believe that, because the governing instrument [the will] and state
laws applicable to estates establish various accounting
principles/practices applicable to estates, that GAAP do not exist for
estate accountings. Using this argument, reports resulting from an
estate accounting should be based on the terms of an agreement.
Interpretation No. 18 of SSARS No. 1 allows CPAs to report on a
financial presentation that is in accordance with terms of an agreement;
however, this approach probably is an acceptable reporting alternative
only when the governing instrument [the will] actually specifies a basis
of accounting.

When reporting on compiled/reviewed financial statements prepared
in accordance with the terms of an agreement, the CPA'S report
should be expanded to include two explanatory paragraphs. The first
additional paragraph should explain what the financial presentation is
intended to present and include a reference to a note to the financial
statements that describes the basis of the presentation and an
explanation that the presentation is not intended to be in conformity
with GAAP. The second additional paragraph should include a statement
that restricts the distribution of the report [e.g., to the executor of
the estate, the beneficiaries of the will, and/or a court of law].

[Practitioner Note: Some CPAs question whether a report prepared
pursuant to the guidance in SSARS No.3, entitled Compilation Reports on
Financial Statements Included in Certain Prescribed Forms, could be
considered applicable to an estate accounting. This question generally
arises when a probate court provides the executor with a specific set of
instructions/illustrations to follow when preparing the estate
accounting. Since the third paragraph of the SSARS No.3 report
stipulates that the financial presentation differs from GAAP, and since
guidance provided by the court would constitute GAAP in an estate
accounting, the SSARS No.3 report probably should not be utilized in
estate accountings.]

Conclusion

While there is no definitive guidance related to estate accounting
in technical literature issued by the authoritative rule-making bodies
within the accounting profession, many CPAs argue that there is a common
body of knowledge available for use in preparing a financial
statement(s) of an estate. These CPAs would argue that the standard
GAAP-based SSARSs report should be issued as a result of the estate
accounting engagement. Other CPAS argue that there is no common body of
knowledge available for use in an estate accounting and that a financial
statement(s) of an estate should be considered prepared based on the
terms of an agreement. These CPAs would argue that the reporting option
allowed in Interpretation No. 18 of SSARS No. 1 should be issued as a
result of the estate accounting engagement.

As long as the financial statement(s) includes a comprehensive note
that explains the particular accounting principles and practices
associated with the estate accounting, either of these reporting options
could be considered to be acceptable. The "agreement"
reporting option simply would require an expansion of the standard two
paragraph compilation report and three paragraph review report that
would be issued under the assumption that these accountings are
GAAP-based. However, since most governing instruments do not specify a
basis of accounting to be utilized by the executor, probably the best
reporting option available to CPAs is based on the assumption that the
estate accounting is based on GAAP and that GAAP-based
compilation/review reports should be issued.

Thomas A. Ratcliffe, Ph.D., CPA is a dean of the Sovell College of
Business and Eminent Scholar in Accounting and Finance at Troy State
University Dr. Ratcliffe who earned his Ph.D. at the University of
Alabama, is the author of more than 100 articles and several books on
accounting and auditing issues.

We have compiled the accompanying charge and discharge statement
for the Estate of E.H. Sherman [Deceased], for the period September 30,
1997 to July 15, 1998, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of
Certified Public Accountants.

A compilation is limited to presenting, in the form of a financial
statement, information that is the representation of the executor of the
Estate of E.H. Sherman [Deceased]. We have not audited or reviewed the
accompanying financial statement and, accordingly, do not express an
opinion or any other form of assurance on the statement.

Frank Lamar & Associates

August 15, 1998

SAMPLE REVIEW REPORT FINANCIAL STATEMENT IN ACCORDANCE WITH GAAP

To Thomas A. Ratcliffe, Executor Estate of E.H. Sherman

We have reviewed the accompanying charge and discharge statement
for the Estate of E.H. Sherman [Deceased], for the period September 30,
1997 to July 15, 1998, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of
Certified Public Accountants. All information included in this financial
statement is the representation of the executor of the Estate of E.H.
Sherman [Deceased].

A review consists principally of inquiries of the executor and
analytical procedures applied to financial data. It is substantially
less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an
opinion regarding financial statements taken as a whole. Accordingly, we
do not express such an opinion.

Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statement in order for
it to be in conformity with generally accepted accounting principles.

Frank Lamar & Associates

August 15, 1998

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